The Nikkei 225, Japan’s benchmark stock index, has experienced a recent decline and is now stalling at the key 200-day moving average. However, there is positive momentum indicated by the hourly RSI indicator. Investors will closely watch the Bank of Japan’s latest quarterly outlook report, as upbeat inflationary forecasts may signal a faster pace of monetary policy normalization. In response, the TOPIX Banks and Financials sectors have already priced in this scenario. It is important to monitor the key short-term support level of 30,490/30,320 on the Nikkei 225.
Since the beginning of Q3 2023, the Nikkei 225 has been struggling and has recorded a negative return of -7.83% as of October 30, 2023, in contrast to a positive performance of +27.19% in the first half of the year. The main cause of the weakness in the Nikkei 225 has been external factors, particularly the bearish trend of the US S&P 500 index. There is a strong correlation between the movements of the Nikkei 225 and the US S&P 500 index, while the correlation with USD/JPY is almost zero.
The upcoming Bank of Japan monetary policy meeting and release of the quarterly outlook report may shift the focus back to more localized factors that could influence the Nikkei 225’s price movements in the short to medium-term. There are expectations for changes to the forward guidance and the possibility of increasing the upper limit of the flexible yield curve control program. Inflation and growth forecast figures will also be closely watched. The latest CPI data has shown signs of inflationary pressures, which may cause the Bank of Japan to upgrade its inflation and growth forecasts.
If the inflationary forecasts turn out as expected, it could signal that the Bank of Japan is moving towards monetary policy normalization at a faster pace. This could have a positive impact on the Japanese stock market as it would address the negative effects of the weakening yen and imported inflation. The banking and financial sectors have already priced in this expectation, with strong returns in the past week.
It is important to monitor the key support level of the Nikkei 225 at the 200-day moving average and the range of 30,490/30,320. Positive momentum has been observed, and a break above the near-term resistance could lead to further gains. However, a failure to hold at the key support level would invalidate the recovery scenario.
